Equity derivatives disclosure to be tightened

LONDON (Reuters) - Britain's financial watchdog will introduce stronger disclosure rules on derivative positions used to build stakes in companies, responding to calls for greater market transparency.

After receiving feedback on a consultation paper published in November, the Financial Services Authority (FSA) said it will demand that existing shareholdings and contracts for difference (CFD) in the same company are aggregated and disclosed at over three percent of the share capital.

CFDs are derivative instruments that can give exposure to a stock without physically owning it. Around 30 percent of equity trades in Britain are in some way driven by CFD transactions.

"Holders of CFDs have been able to secure stakes and voting powers in companies 'at arm's length' without the knowledge of other shareholders and the management of those companies," Director General of the Association of Investment Companies Daniel Godfrey said.

"These undisclosed interests are contrary to good governance where managers are fully accountable to their shareholders and investors are able to see who else may have an influence over the company which they own."

CFDs do not carry voting rights, but can be converted into shares with voting rights by the investment banks who sell the derivatives and hold the underlying shares in order to hedge their own positions.

The Investor Relations Society welcomed the FSA's announcement but called on the regulator to speed up its timetable for the changes.

The FSA will publish a policy statement and draft rules in September with final rules to be published in February 2009. The new regulation will exempt CFD writers who act as intermediaries.

"Our goal is to provide an effective and proportionate disclosure regime that works for all involved, and sustains market confidence and efficiency," FSA Director of Markets Alexander Justham said.

(Reporting by Eleanor Wason; Editing by Quentin Bryar)